How do I check my coding notices?
If you get money from an occupational pension, private pension or retirement annuity, the pension payer deducts tax from your pension under the Pay As You Earn (PAYE) system. HM Revenue & Customs (HMRC) issue a PAYE code to the pension payer to tell them how much tax to take off.
The following information does not apply to the state pension, which is paid gross (i.e. without deduction of tax at source).
How does PAYE work?
There is general information on how PAYE works for both employees and pensioners in the employment section. In this section, we look at some pensioner-specific issues.
What happens when I start to receive a pension?
When you start to receive a pension for the first time, HMRC are not able to work out your tax code until they have received some information from either you or your pension provider.
You may have a form P45 to hand to your pension provider if, for example, you have just stopped working and immediately afterwards start to take a pension.
But if you do not have a form P45 to hand, your pension provider should send details of your new pension direct to HMRC via the electronic PAYE system. As a pensioner, you will not see this yourself, as the pension company submits the information directly to HMRC.
What are payslips?
If you are getting a pension, you generally do not get a payslip with each pension payment. However, you should get some form of notification if there is any change to the amount of pension payment, for example, if your tax code changes.
What happens at the tax year end?
As long as you are receiving a pension at 5 April, the end of the tax year, your pension provider will give you an ‘end of year certificate’ – form P60 or its equivalent – by 31 May. This shows the total amount paid in the tax year, the tax deducted and the final tax code in operation. You should check that the PAYE code shown on the form is correct.
Each time your pension payer pays you, they tell HMRC how much they have paid you and how much tax they have taken off. After the end of the tax year, HMRC check that the tax deducted is the right amount, according to their calculations, based on the information they hold. If it is, no further action is likely to be needed. If their calculations show that the right tax has not been deducted, HMRC will contact you.
There is more information on reconciliations and refunds in the employment section.
What is an emergency tax code?
Our employment section explains when an emergency tax code may be applied. This tends to occur when you start a new job.
But emergency codes can also be used when taxing money taken out of pensions under the flexible pensions rules. This might be the case if you take money out in lump sums (rather than as a pension income), either regularly or irregularly, or if you take the whole amount of a pension pot as a lump sum. You may need to watch out as you may not pay the right tax at the right time. Read our separate guidance on this.
There is general information for employees and pensioners about who gets a PAYE coding notice in the employment section.
Pensioners may get coding notices more often than employees, as you may have more than one source of income. HMRC usually send these to you in February for the tax year starting on the next 6 April. If you do not receive them, contact HMRC to ask for copies.
How do I check my PAYE coding notice?
There is information for employees and pensioners on how to check your PAYE coding notice in the employment section.
You should check your PAYE code and what tax your pension payer is taking off your income. You will generally receive a paper 'coding notice' (also known as a form P2) through the post; this explains your PAYE code(s). It will usually look like this:
Click on the picture above to find out more about the figures and information that make up your tax code.
If you do not understand your PAYE code or think it might be wrong, you should query it with HMRC. You can find details of how to contact HMRC on the GOV.UK website.
Pensioners might receive more than one pension from the same pension provider. If this is the case, you should check that you have a code number for each pension – they might have different PAYE scheme reference numbers, for instance. The codes should be contained on the same coding notice. If you need clarification, as above, contact HMRC.
Notes explaining each item in the tax code calculation
The coding notice provides a note for every item in the tax code calculation. These notes are intended to help you to check your tax code, but the way the tax rules work means this is not always straightforward. There is more information in the employment section.
Gift Aid contributions are made net of basic-rate tax. For example, if you make an £80 net Gift Aid donation (meaning you actually pay £80, for example, in cash or electronically) then the charity will reclaim from HMRC the basic-rate tax paid on that donation, which in this case will be £20 (as £100 less 20% basic-rate tax is £80). In effect, the charity has received a £100 donation from you out of your pre-tax income.
If you only pay tax at the basic rate, then there is nothing further to be done (although see below if you also claim married couple’s allowance) and no adjustment to your tax code is required.
If you pay tax at the higher rate (40%), then making the same £80 donation to the charity under Gift Aid will mean that the charity reclaims £20 from HMRC as before (meaning it gets a total of £100). However, as you will have paid £40 (£100 at 40%) tax on the gross amount, you are entitled to a further £20 relief.
Strictly, this is done by increasing the amount of income taxed at the basic rate by extending your basic rate band. However, tax relief can be given in-year through your tax code, by increasing the personal allowance – in this case by £50 (meaning that £50 of income is tax-free rather than taxed at 40%, saving tax of £20). If you are a higher-rate taxpayer you may see this adjustment in your tax code.
If you have married couple’s allowance in your coding an adjustment has to be made, because your tax-free amount reduces the tax you pay at 20%, whereas the law says that tax relief for married couple’s allowance is to be given at 10%.
For example, if you are a married man, born before 6 April 1935, and your income in 2018/19 is £19,880, your tax relief for married couple’s allowance will be £8,695 at 10% = £869.50.
But the calculation box in your coding notice would look like this:
This is how we worked out your tax code(s):
|personal allowance||£11,850 (see Note 1 below)|
|married couple's allowance||+ £4,348 (see Note 2 below)|
|Less state pension||- £7,865 (see Note 3 below)|
|a tax-free amount of||= £8,333 (see Note 4 below)|
Having £4,348 in your coding reduces the tax you pay, at 20%, by £869.50. This is the same result as £8,695 at 10%.
Married couple’s allowance and Gift Aid
If you or your spouse or civil partner were born before 6 April 1935 and you claim married couple’s allowance, having income above £28,900 (for 2018/19) will restrict your claim. However, in working out the income to test against the threshold, you should deduct gross Gift Aid contributions. Therefore, if you claim married couples’ allowance with income above the threshold, making Gift Aid contributions will increase the amount of the allowance you are entitled to, meaning you pay less tax.
For example, if your taxable income is £30,000 and you are eligible for married couple’s allowance, a net Gift Aid contribution of £80 will reduce your income to be tested against the married couple’s allowance threshold by £100 (£80 plus the £20 tax which the charity reclaims). This will increase your married couple’s allowance by £50 (as the married couple’s allowance is restricted by half of the difference between the income and the threshold), which means a £5 reduction in your tax bill as the relief is given at 10%.
This tax relief should be given to you on your tax code. Remember that tax codes operate by adjusting your personal allowance. If you are a basic rate taxpayer, in order to give tax relief of £5, you will need a £25 increase in your personal allowance (£25 of income which is tax-free rather than being taxed at 20% saves tax at £5). You should see this adjustment in your tax code. If you do not, you can ask HMRC to include it.
Here is an example to help you work out what your tax should be from your tax code. There are more examples in the employment section.
Tom receives an occupational pension of £14,300 a year before any tax is taken off. His pension is paid monthly and his code number for 2018/19 is 205L.
This means Tom has a tax-free amount of allowances of £205 x 10 or £2,050.
|Take off tax-free amount of allowances||2,050|
|Pension on which Tax pays tax||12,250|
|£12,250 @ 20% (basic rate)||2,450|
So the tax to be paid by Tom during 2018/19 is £2,450.
The tax he will pay each month will be £2,450 divided by 12 = £204.17.
The code of 205L means that his personal allowance of £11,850 for 2018/19 has been reduced by £9,800. This is likely to be because his state pension is being taxed using this PAYE code. Tom should check that £9,800 is the amount of state pension he expects to receive in 2018/19. He can do this by checking it against the weekly amount he will be getting from April 2018, which the Department for Work and Pensions should notify him of by letter in around March 2018.
Where can I find more information?
You may be able to take money out flexibly from some kinds of pension, or the whole of your pension as a lump sum. In that case, you should read our guide to flexible pensions.
For information on how tax on your state pension is collected, also look at How is my tax collected?.
Sometimes people face particular problems with their tax code on retirement. We have more information on the page Tax code problems on retirement.